As long as enough money is coming in to cover your expenses, life is fairly good. As our cash hoard grows, there’s also less financial stress because you can more easily cover unanticipated emergencies like a furlough.

In general, having 6 – 12 months of living expenses in cash or cash equivalents is good enough for the average person to sleep soundly.

There might come a point, however, when you will have excess cash. Perhaps you were undisciplined in your monthly dollar cost averaging strategy or maybe you got a bigger windfall than anticipated.

Whatever the case may be, your financial anxiety will be replaced with the fear of missing out on potentially bigger gains in risk assets like stocks and real estate. Given your peers are all getting rich, you will want to follow suit.

If enough greed kicks in, you will end up taking on more risk than you can comfortably withstand, and sometimes bad things will happen. Your financial stress returns once again. Hence, one benefit of following Financial SEER.

No matter how much money you have or how much you make, you will always have to work on managing your financial stress. After all, the more money you have, the more you have to lose! When you are broke, you’ve only got upside.

Money is mental. Psychology is why during market sell-offs, there will be headlines about stocks re-testing Great Depression lows. And during bull runs, there will be headlines about how the sky is the limit and you just can’t lose.

How to continue moving forward on their path to financial freedom despite all the uncertainty

One of my primary goals on Financial Samurai is to help readers build meaningful wealth in a risk-appropriate manner. Because I started my career soon after the 1997 Asian Financial Crisis, I’ve experienced a lot of carnage as many international college students in the US had to drop out due to a sudden and massive devaluation of their respective home country’s currencies. I fully appreciate how hazardous the road to building great wealth can be.

Even the best-made plans can be laid to waste due to some unforeseen exogenous variable. We always hope for good surprises along the way. Unfortunately, life always has a way of kicking us in the face after knocking us in the teeth. Let’s always be thankful for what we have and demonstrate kindness to those who are experiencing difficult times.

Most investors overestimate their risk tolerance, especially investors who’ve only been investing with significant capital since 2009. Once the losses start piling up, it’s not only the melancholy of losing money that starts getting to you, it’s the growing fear that your job might also be at risk.

You might also erroneously think that the richer you get, the higher your risk tolerance. After all, the more money you have, the bigger your buffer. This is a fallacy because the more money you have, the larger your potential loss. For most rational people, their lifestyles don’t inflate commensurately with their wealth. This is why even rich people can’t resist a free rubber chicken lunch.

Further, there will come a time when your investment returns have a larger impact on your net worth than your earnings. As a result, the richer you are, the more dismayed you will be to lose money. Your main hope for recovery is a rebound in investment performance because your work earnings won’t contribute much at all.

Fed Chair and centimillionaire Jerome Powell is a DIRE Movement enthusiast by continuing to raise rates despite a global stock market sell off. More pain is on the horizon as JP bows to no one.

I’ve never liked investing in stocks as much as I enjoy investing in real estate due to the volatility, occasional corporate malfeasance, and countless uncontrollable exogenous variables stocks face.

When you’re but a piddly minority investor with no say in anything, investing in stocks can sometimes feel hopeless. However, I recognize that investing in stocks is one of the best ways to build wealth over the long term, which is why I’ll always have at least 20% of my net worth in stocks.

Although losing money in the stock market is never fun, I thought I’d highlight some benefits of a stock market meltdown. After all, if it wasn’t for the global financial crisis, Financial Samurai would never have been born.

Hopefully, everybody has been building a CD Step Stool or a Bond Step Stool (not a ladder) in this rising interest rate environment. A Step Stool is the smarter approach because the short end of the yield curve has been rising faster than the long end.

The Fed Funds rate is the shortest of the short end, given it is the overnight interbank lending rate. The idea is that the more the Fed Funds rate increases, the higher yields should rise for longer duration lending rates due to the time value of money.

But the market controls longer term lending rates, and the market is currently telling the Fed to bugger off. Investors have found comfort in longer term bonds because their risk appetite has diminished. They don’t see inflation on the horizon nor do they see rosy good times.

To understand why buying shorter duration bonds and certificates of deposits is the optimal financial move for your cash, let’s take a look at a simple bond yield table.

There’s a lot of uncertainty as we head into 2019. The Fed is expected to raise rates another two to four times. We’ve got a slowing housing market thanks to rising rates, rising inventory, and lower overall affordability. We also have constant geopolitical risk that never seems to go away.

As investors, we must properly forecast the future AND put our money where our forecasts are. To just forecast while taking no risk is like wanting to go straight to the corner office without putting in any work – it makes no sense!

I’m guessing one of the reasons why you enjoy reading Financial Samurai is that I’m not just pontificating about investing. I’m actively trying to build my net worth to live a middle class lifestyle in an expensive city. Sometimes I strike out. Sometimes I hit a home run. Hopefully, through self-reflection and through community feedback, we can make better investment decisions.

To get savvier, let’s look at what some of the top Wall Street strategists are forecasting for the S&P 500 in 2019. These folks spend 50 – 70 hours a week thinking about the stock market, writing research, and speaking to the largest money managers in the world. Surely, they know more than the average retail investors.

There are just a couple caveats. One, they aren’t putting their own money at risk or managing money for others. Two, they love to hedge their forecasts because that’s how they earn Managing Director-level compensation which starts at $400,000 a year in base salary and they regularly receive $500,000 – $3,000,000 year-end bonuses, especially if they can get their forecasts right.

Liquidity is overrated. Once you have about six months worth of living expenses saved, there’s really no need to hoard even more cash since you have insurance. If you do accumulate more cash, that’s called “cash drag” because cash returns have underperformed assets such as stocks, bonds, and real estate since the beginning of our financial markets.

Once you identify a trend, your goal should be to buy assets that benefit from that trend, and hold on for as long as possible. Of course, if you think an impending bear market is on the horizon, holding more cash is good. However, over the long-term, having too much liquidity I argue is a detriment.

When I first came to San Francisco in 2001 from Manhattan, I discovered that San Francisco property was so cheap compared to Manhattan property, yet wages were quite similar. Consequently, I bought all the real estate my salary could afford in 2003, 2005, and 2014, and held on for as long as possible.

Now, I foresee a similar long-term trend happening in the heartland of America because San Francisco and other coastal cities have gotten too expensive and technology makes living in a congested area while paying $4,500/month for rent, unnecessary and obsolete. Companies located in high cost of living areas can’t comfortably afford to hire workers, and the workers can’t comfortably afford to save for retirement and raise a family.

Every single one of my biggest investment wins has occurred because I waited 10 years or longer before selling. There was only one stock that I made an enormous return in just six months, but that was dotcom bubble luck. On the other hand, there are plenty of stocks I lost tons of money on because I got shaken out way too early. If I had held on, I would have been much better off.

When you’re young, you spend time accumulating wealth. When you’re old, you should spend time protecting wealth.

Multi-millionaires go broke all the time because they exposed themselves to too much risk and temptation. Think about all those pro athletes who would still be rich if they had just kept all their money in a bank.

Since 2010, money market and CD rates have been particularly horrible. Retirees depending on fixed income were forced to take more risk. And thankfully, such risk has paid off as the S&P 500 and the real estate market across various parts of the country took off. Further, we’ve all been able to refinance our mortgages at rock bottom rates.

But now, rates are finally moving up given the Federal Reserve has raised their Fed Funds rate multiple times since 2015. No longer do you have to lock in a CD for five years to get only a 2% rate. No longer are you only getting 0.1% on your money market account either. Remember those dog days? You can now get a 12-month CD paying 2.5%+ or a money market account that pays 2.45%.

With a 12-month CD rate paying 2.5%, you’d think that you could get a much higher rate if you decide to lock up your money for longer. Unfortunately, the best rate for a 5-year CD is currently about 3% in 2018, hardly high enough to lose four more years of liquidity.

As a result of a flattening yield curve, financially savvy individuals should optimize their cash and build a CD Step Stool and NOT a CD ladder. The first step is a one-year CD and the second step is a two-year CD at most. With each expiration of the CD, the strategy is to re-invest the proceeds in another 12 – 24 month CD. Only if the yield curve steepens should you consider building a CD ladder where you’re investing in three, four, five, seven, and 10 year CDs.

Let’s look at various financial scenarios where building a CD Step Stool may or may not make sense.

To start, there is no “correct” asset allocation by age. But there is an optimal asset allocation I’d like to share in this post. Your asset allocation between stocks and bonds depends on your risk tolerance. Are you risk averse, moderate, or risk loving? I’m personally risk loving or risk averse, and nothing in between. When I see “Neutral” ratings by research analysts, I want to slap them upside the head for having no conviction. Then the optimist in me thinks what a great world to have occupations that pay well for providing no opinion!

Your asset allocation also depends on the importance of your specific market portfolio. For example, most would probably treat their 401K or IRA as a vital part of their retirement strategy because it is or will become their largest portfolio. Meanwhile, you can have another portfolio in an after-tax brokerage account that is much smaller where you punt stocks. If you blow up your online trading account account, you’ll survive. If you demolish your 401K, you might need to delay retirement for years.

I ran my current 401K through Personal Capital to see what they thought about my aggressive asset allocation. To no surprise, the below chart is what they came back with. I essentially have too much concentration risk in stocks and am underinvested in bonds based on the “conventional” asset allocation model for someone my age. To run the same analysis on Personal Capital, simply click the “Investment Checkup” link under the “Investing” tab.

If you need more incentive to generate passive income in order to give yourselves more freedom to do what you want, then look no further than the below two charts.

The short-term capital gains tax rate is equivalent to your federal marginal income tax rate. Once you hold your investments for longer than a year, the long-term capital gains tax rate kicks in and goes way down.

Capital Gains Tax Rates By Income For Singles

If you’re single, the largest tax spread difference between short-term and long-term is if you make $200,001 – $425,800 in capital gains. We’re talking a 20% lower tax rate (35% vs 15%).

To generate $200,001 – $425,800 in capital gains you could earn a 4% rate of return on $5,000,000 – $10,645,000 in capital, earn qualified dividends at the same rate with the same amount of capital, take profits on long-term holdings, or you can do a combination of everything.

For the 2018 tax year, you will not need to pay any taxes on qualified dividends as long as you have $38,600 or less of ordinary income. If you have between $38,600 and $425,800 of ordinary income, then you will pay a tax rate of 15% on qualified dividends. The rate for $425,801 or more is 20%.

Over the years, many people have inquired whether they should invest more or save for a downpayment. A home, after all, is usually the most expensive asset someone will buy in their lifetimes. Coming up with the downpayment is one of the biggest financial hurdles anybody can overcome. Furthermore, nobody wants to remain in a rental if they know they plan to live in an area for an extended period of time e.g. five years or more.

I’ll share with you my framework on how to figure out whether to invest or save for a downpayment. We’ll also talk through the decision process of deciding how much to invest in a pre-tax investment account like a 401k that has early withdrawal penalties before age 59.5, or invest in an after-tax digital wealth advisor like Wealthfront where you can easily get liquid without any penalties to buy your home.

PRIVACY: We will never disclose or sell your email address or any of your data from this site. We do highly welcome posts and community interaction, and registering is simply part of the posting system.DISCLAIMER: Financial Samurai exists to thought provoke and learn from the community. Your decisions are yours alone and we are in no way responsible for your actions. Stay on the righteous path and think long and hard before making any financial transaction! Disclosures